Go Where the Big Money Flows

Go Where the Big Money Flows

Follow the money in markets, or so they say. Well, I’ve got one place for you to look today.

Last weekend, The Australian ran a story citing evidence that private investors in Australia — typified by SMSF operators — could have as much as a quarter of their portfolios in cash right now.

That’s a high weighting — too conservative for my tastes.

This money is probably attracting deposit rates of around 2-3%.

That’s pretty crummy, considering some Aussie share market funds returned over 20% last year.

Consider, too, that the dividend yield on the ASX 200 is still above 4% — plus you get the chance of capital growth.

Of course, past performance is no guarantee of future performance.

But, if the share market continues to show strength, or at least stability, I think this money will get drawn into the stock market…and bring opportunity with it.

No imagination needed for this trade

It’s fairly predictable where this SMSF money will go IF investors decide to allocate more of their portfolio to Aussie stocks.

A recent study I saw showed that SMSF portfolios are heavily invested in the ASX top 20 stocks.

You know the story. The big four banks. Telstra.

I’m not saying this is right or wrong. I’m just stating the facts.

We don’t have to reinvent the wheel here. Most of the new money, if it’s allocated to the ASX, will probably head to the same place.

The top 20.

So it’s no great stretch that you should look for opportunities around this area of the market.

Because know one thing: Self-managed super funds now account for something like 30% of total superannuation assets.

That’s around $697 billion. Hardly chicken feed.

It bolsters my case that Aussie stocks will be a fun place to be this year…

Mainstream too conservative

I’m starting to see a few investment banks and analysts raise their price projections for Aussie stocks this year.

Most of these seem to suggest the index will finish up around 6,200-6,500 points.

Maybe they’ll be right. None of us have a crystal ball. But hey, for my money, I think these forecasts are way too conservative.

These guys don’t have the guts to stick their neck out.

I’m very excited about the Australian stock market this year. I’ve made the case a few times as to why I think it will break into all-time new highs.

Look at this wildcard no one expected

A recent report on Rio Tinto Limited [ASX:RIO] provides another angle on this.

The company’s iron ore rail network is close to being completely run using robotic trains.

This negates the need for mid-journey driver swaps and train downtime, plus means more trains operating at one time.

There’s a potential AU$1 billion (US$750 million) profit from this in 2019 alone, if iron ore prices stay at their current level. It’s because Rio can export an additional 20 million tonnes of iron ore a year from the efficiency gains.

Rio is a big influence on the overall market because it’s such an enormous company. And the market will price this in early.

Iron ore is showing a lot more strength than anyone gave it credit for so far over the last six months.

Of course, there’s no guarantee that iron ore will stay at these prices.

But don’t forget China is rolling out its ‘One Belt, One Road’ infrastructure push. One estimate puts the cost at US$8 trillion.

That would be 50 times the size of the Marshall Plan — the money the US spent to rebuild Western Europe after the Second World War.

Historically, this is enormous if it all comes to fruition.

So iron ore certainly could stay at these levels.

Chinese buyers are also showing a preference for the higher-grade iron ore produced by BHP and Rio, compared to smaller players like Fortescue Metals.

A strong BHP and RIO, combined with the big banks cashed up after recent asset sales, could give Aussie stocks a big lift this year.

This positive momentum should keep flowing into the small cap sector too — right where we need it to be. There are going to be plenty of opportunities this year. Go here for my latest report on this.


Callum Newman,

Editor, The Daily Reckoning Australia